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Pre-Congress Symposium
XIIth EAAE Congress
Gent, 26-29 August, 2008
EU PROJECT
TERA

FINAL CONFERENCE
Territory and rural development
in six European countries
EU PROJECT
TERA
(CT 2005-006469)
[T]erritorial aspects of [E]nterprise
development
in [R]emote Rural [A]reas

Main Findings of the TERA Project
Demetris Psaltopoulos
University of Patras
Introduction
• Afternoon Session of the Symposium:
 model design,
 data collection
 model construction
• Next presentation by Prof. Kola:
 interpretation of results
 link to territorial factors
 policy implications and recommendations
Introduction
• Aim of this presentation: To present an overview of
the main findings of the TERA modeling work.
• Results of the three modeling approaches:
 CGE Models (bi-regional; rural/urban)
 NEG model (“No Taxation without Infrastructure”
paper by Marattin)
 New-NEG model (multi-region multi-sector model
of inter-regional trade by Mion)
• Comparison of these results
Common CGE Simulation Scenarios
1. Labour and Migration: +/- 10% in labour supply;
+20% unskilled labour; -20% skilled labour
2. Changes in Trade: +1% in the price of all
exports/imports; +10% in the export price of
agriculture; +10% in the price of hotels and
restaurants; +10% in the export price of most
important manufactured commodities
3. Agricultural Policy: -30% of coupled subsidies; full
decoupling; 100% transfer of Pillar 1 subsidies into
Pillar 2 (Axis 3); 20% modulation – 80% SFP
4. Transport Infrastructure: +20% in the productivity
of the transport sector; -20% in transportation costs
Labour and Migration
 Basic Analysis
 +10% in labour supply: increase in GDP (4.6%
Greece to 8% Italy)
 -10% in labour supply: similar negative GDP
effects
 Rural GDP effects: +2% (Greek area) to +9%
(Italian area)
 Urban GDP effects: +5% to + 8%
 Increase in labour supply: wage reduction (2-15%
skilled labour; 2-13% unskilled labour)
Labour and Migration
 -20% skilled labour
 Considerable losses in output (-5% Greece/Finland to –13%
Czech area)
 Reduction in tax revenue
 Urban areas and secondary sectors worst hit
 Increase in skilled labour wages
 +20% unskilled labour
 Income gains (+1% Czech area to +5.8% Finland)
 Decrease in unskilled labour wages
 Very small effects on producer and consumer prices
 Change in skilled labour results into higher GDP effects
compared to changes in unskilled labour
Changes in Trade
 Basic Analysis
 +1% in world export prices: small effect on GDP
(-0.4% Finland to +1.7% Czech area); increase in
regional exports (+1% Greece to +11% Scotland)
 +1% in world import prices: small negative effects
on regional income; reduction of private consumption
(-0.34% Italy to -6.55% Czech area) and imports (0.8% Greece to -21% Scotland)
 Wages: Increase when export prices rise – decrease
when import prices rise
Changes in Trade
 +10% in world export price of “agriculture”
 Considerable rural/urban differences (much larger rural GDP
effects)
 Positive GDP effects (except Finland), especially for the
primary sector
 Large shift in factor incomes/rents towards agricultural
sectors of the study areas
 +10% in the world export price of “hotels and
restaurants”
 Very small GDP impacts
 Possibly explained by the “Dutch-disease” literature
Agricultural Policy
 -30% in coupled agricultural support
 Marginal negative effects on GDP (-0.004% Italy to -0.8%
Latvia) with the exception of the Finnish area (slight gains)
 GDP losses concentrate in rural areas
 Marginally positive effects on urban GDP: increases in
allocative efficiency
 Losses in rural unskilled jobs (mostly primary sector)
 Very marginal effects on consumer prices; agricultural
products prices increase much higher than changes in non-farm
products prices
 Decline in household consumption (especially agricultural
households)
Agricultural Policy
 Full Decoupling
 Higher negative GDP impacts compared to SC1, due to significant
negative projections for the primary sector (-1% Greek area to 28.6% Czech area)
 Rural economies affected more negatively and urban economies
more positively compared to SC1
 Pillar 2
 Mixed impacts: Higher negative impacts (compared to SC1 and
SC2) for Italian, Scottish and Greek areas; more positive impacts for
the Latvian, Italian and Czech areas
 Main loser is the rural primary sector but rural manufacturing and
services rather gain
 Positive urban impacts, especially for the secondary sector
Transport Infrastructure
 Increase in the productivity of the transport sector
 Short-run: gains in (especially urban) GDP (+1% Italy to
+3.6% Latvia); tertiary sector benefits most
 Long-run: Higher (compared to S-R) total impacts in the
Italian, Scottish and Latvian areas, lower (still positive) in the
rest
 Long-run benefits directed towards rural parts of the study
areas
 Increase in both indirect taxes and income tax earnings
 S-R: Marginal increase in the prices of all commodities;
decrease in the price of transport (-3.5% Scotland to -20.2%
Greece). Notably higher price increases in the L-R
Transport Infrastructure
 Decrease in transportation costs
 Short-run: Very marginal re-distribution of economic
activity; losses for secondary sectors
 Long-run: Marginal gains for Scotland and Greece; marginal
gains elsewhere
 Benefits for unskilled rural labour and skilled urban labour
 Marginal increase in commodity prices; decrease in the price
of transport
 Short-run: Increase in household consumption; higher longrun effects
 Benefits directed towards urban parts of the study areas
Some Additional Region-Specific CGE Simulations
Aim: To explore region-specific issues raised in the context of
interviews with local stakeholders and policy makers (WP7: TF
and
structural
policies;
policy
implications
and
recommendations)
Here we (indicatively) present the results of the following 4
region-specific simulations:
 Investment (Italian area): +10% investment in innovative
sectors + 10% skilled labour demand for urban manufacturing
 Soft Modulation (Scottish area): Pillar 2 spending not only
in Construction (as in SC4), but split between Construction,
Education, Business Services and Public Administration
 -10% on employers social security payments (Finnish area)
 +30% in land prices and rents of the rural part of the study
region (Greek area)
Investment Simulation (Italy)
 + 10% in innovative investment
 Very slight decline in domestic activity (-0.02%), household
consumption (-0.20%) and imports (-0.04%)
 Very marginal increase in exports
 + 10% in skilled labour demand
 Notable positive effects: +1.7% GDP; +1.5% HHS
Consumption; +2.4% Exports; +0.72% Imports
 Important to note here that an equivalent increase in
investment in Construction generates positive impacts for the
Italian area
Soft Modulation Simulation (Scotland)
 GDP losses marginally lower than “Hard Modulation” (0.15% compared to -0.19%); losses remain for the rural area (0.63% to -0.64%), but the urban area gains (+0.17% to -0.11%)
 Further decline in private consumption (-1% to -0.2%) and
exports (-0.41% to -0.34%)
 Gain in investment (+3.39% to -0.39%)
 Wages of skilled workers fall by less than in HM, but the
decrease in the wages of unskilled workers almost doubles
 The decline in urban rents is reversed
 The large fall in the value of agricultural land persists
Cut in Employers’ SSP Simulation (Finland)
 Small increase in investment, private consumption, exports
and imports
 Very marginal decline of GDP, but benefits for the
secondary sector
 Positive impact on demand for blue-collar workers; negative
for demand for white-collar workers
 Marginal decrease of factor incomes
 Increase in the income of working households – decrease for
other households
Rural Land Prices Simulation (Greece)
 Notable GDP decline (-0.36%), especially for rural area (5.3%), rural primary (-9.4%) and secondary (-4.2%) sectors
 Slight decline in urban GDP (-0.13%)
 Decline in private consumption and exports
 Highly negative effects for rural skilled and unskilled
employment: Indicatively unskilled rural jobs in the primary &
secondary sectors decrease by 8%; rural skilled jobs by almost
6%
 Marginal gains for urban jobs
 Significant increase in the price of primary goods (+6.25%)
 Household income declines, especially for rural and
(mostly) agricultural households
NEG model (Marattin)
 Tax rate simulation
 +2% / +4% in the urban region tax rate
 +2% / +4% in the rural region tax rate
 Main findings
 Increase in urban tax rates decreases production differentials
especially in Latvia, Greece and Italy
 The economy is less hit if the initial tax rate is high
 Real wage differentials increase (taxes finance infrastructure
development which in turn, promotes economic activity
concentration)
 Increasing rural tax rates increases production differential
(i.e. the periphery is hit)
 Real wage differentials decrease very marginally
NEG model (Marattin)
 Labour force simulation
 +5%/+15% in the urban area labour force (third region / rural
region)
 +5% / +15% in the rural area labour force (third region)
 Main findings
 Increase in urban LF increases production differentials
 In the case of outside-migration, effects are higher where the rural
region is large in size (IT, SC, FI)
 The bigger the periphery, the greater the increase of production
differentials in favour of the urban region
 Production differentials decrease if the labour force of the rural
region increases (especially if the periphery is bigger)
 Real wage differentials increase if the urban labour force increases
and vice-versa
New-NEG model (Mion)
 Inter-regional trade simulation (rural area + 5 adjacent
areas)
 Inter-regional trade barriers reduced by 5% (further trade
integration)
 Main findings
 Notable gains in average productivity (4.8% Greece – 0.5%
UK)
 Significant gains for rural areas in Czech Republic,
Scotland, Finland; smaller gains for Greece, none for Italian
and Latvian areas
 Adjacent urban areas have little to gain
 Gains vary substantially across sectors
New-NEG model (Mion)
 Population increase simulation (rural area + 5 adjacent
areas)
 Population increases by 5% in the area where the study area
is located
 Main findings
 Remote rural record sizeable gains if population and market
size increase.
 Impacts do not display a significant industry heterogeneity
 For East Highlands, Plain Po and Latgale an increase in
local market size is more beneficial than market integration
Last, but not least….
 Three different approaches have been used to analyse
rural development and the role of policy in remote rural
regions of Europe
 Our findings would be clearer and more robust if results
from different approaches lead to the same direction
 Labour Simulations
 An increase in labour supply clearly benefits the study
regions (according to results from all 3 approaches); there are
considerable positive effects on economic growth
 The direction of immigration is a key issue
 Also, the New-NEG approach shows considerable gains in
productivity
Last, but not least….
 Infrastructure Simulations
 CGE (increase in transport sector productivity; decline in
transportation costs); NEG (impact of taxation utilized to build
infrastructure); New-NEG (reduction in trade costs)
 Results are mixed and much less univocal than those related to the
migration simulations
 In some cases (e.g. Italy), the New-NEG approach indicates no
gains from trade integration; this rather contradicts the direction of
the CGE and NEG findings
 In other cases (e.g. Scotland, Greece), results suggest regional
benefits in terms of productivity (New-NEG) or GDP (CGE); on the
other hand, NEG results show a significantly positive correlation
between urban-tax increase and real wage differentials
THANK YOU FOR YOUR ATTENTION!